How do monopolies arise

What is ... ... A MONOPOLY?

-In 1881 the gentlemen of the Brazilian city of Manaus decided to build an opera, the Teatro Amazonas. They hired the best architects in the world and had Italian marble brought to the rainforest. They were extremely rich, because money flowed like rubber in what was then the only rubber-growing area in the world. The Brazilians could demand any price for their raw material: they had a monopoly.

At the same time, British researchers were experimenting with rubber seeds, and around 20 years later the first rubber trees were growing in Malaysia. Around 1910 the prices for the raw material tumbled, the monopoly was broken, the rose-colored palace of the Teatro Amazonas rotted away for decades.

The rubber market exemplified what the Austrian economist Joseph Schumpeter called the process of creative destruction: Every entrepreneur wants to be a monopoly and is therefore looking for innovations that give him a unique position in the market. If he achieves that, he earns a lot of money. This attracts imitators who offer better or cheaper products - competition arises.

Seen in this way, monopolies promote progress, which is why the state favors them in a certain way. "The administration's answer is patents," says Silke Kaul, spokeswoman for the Federal Cartel Office. The companies get the chance to amortize their development costs through the temporary protection against competition. This mechanism can be seen most clearly in the research-based pharmaceutical industry, which is constantly on the lookout for new active ingredients.

If monopolies are permanent, however, they harm consumers because monopolists can charge excessive prices if they have no competitors. Cartels, i.e. secret price agreements between companies in an industry, are just as harmful from a competitive point of view: Customers and smaller competitors are at the mercy of them too.

In order to avoid permanent monopolies or cartels, there are competition authorities in many countries. In Germany, the Federal Cartel Office is responsible for this. It has to break up cartels, punish anti-competitive behavior, approve corporate mergers and joint ventures. On request, it also checks whether federal government contracts have been lawfully awarded. However, the question of whether a merger or cooperation between different companies is economically questionable or useful is often difficult to answer. The Federal Cartel Office recently approved a joint project between the three market leaders in mobile communications, subject to certain conditions, which is intended to advance the development of mobile television. "Nobody knows how this new market will develop," says Silke Kaul. The Cartel Office has thus decided to promote innovation. But if things go wrong, a cartel is formed.

"The crux of the matter is that on free markets you don't always know whether a monopoly will last," says Justus Haucap, professor of economic policy at the University of Erlangen-Nuremberg and member of the monopoly commission, which regularly assesses company concentration in Germany.

If a monopoly is formed, it is often difficult to get rid of it. For example Microsoft: 95 percent of all PCs worldwide work with the Windows operating system. A classic monopoly. Both the US competition watchdogs from the Department of Justice (DOJ) and the employees of the European Commission's Directorate-General for Competition wanted to set limits on the monopoly. The charges against the competition authorities were similar: Microsoft was abusing its market power with Windows in order to oust providers of innovative products.

In 1998, a court in the United States opened the antitrust proceedings, and two years later it threatened to be broken up. Microsoft appealed against the judgment and got away with a settlement: The company agreed with the DOJ that it must allow competitors to look into the operating system at technical interfaces and facilitate the integration of external software in Windows. In addition, the company will be under judicial supervision for five years, until mid-November 2007. The Microsoft opponents were not satisfied and went to the European Commission, which imposed comparable cartel penalties.

Microsoft resisted, but lost the trial in September this year before the European Court of Justice. Its judgment confirmed the arbitration award of the European Commission.

What really worries Microsoft today is neither the one nor the other judgment, but precisely the technical progress that is now creating competition. More and more often, software can be downloaded directly from the Internet or is already integrated into the hardware. Here, Google and Apple are far ahead. "Microsoft's power is crumbling at a rate that until recently was hardly thought possible," says Tobias Groten from the software company Tobit.

So in the case of Microsoft, the competition watchdogs have done nothing, but the market seems to be regulating it. But it doesn't always have to be that way. Without the Cartel Office, Germany would still be a country with little competition. Cartels have been legally allowed here since 1897, and entrepreneurs saw them as a sign of solidarity - one cared for one another. The National Socialists even created the compulsory cartel law to have a better grip on the economy. It was only at the urging of the Americans and against massive opposition that the Adenauer government passed the Act against Restraints of Competition (GWB) in 1957.

For a long time it was also believed in Germany that only the state could administer natural monopolies. These include infrastructure networks such as telephone and power lines, roads, airports, the rail network and postal services. It is not worth holding them up twice. "Nobody had the idea that several providers could use the networks," says the economist Haucap.

An extremely tricky thing: regulating natural monopolies

The European Commission in particular has been pushing for competition since the 1980s. Since then, the Federal Republic of Germany has liberalized the markets for telecommunications, post, electricity and gas - with more or less good results.

The deregulation of the telecommunications market was quite successful. When the Telecommunications Systems Act, which gave Deutsche Telekom a monopoly on telephone tariffs, fell in 1998, prices fell almost daily. Technically, there was also progress. For a long time, however, there was a lack of access to the natural monopoly of access lines. Because the infrastructure is still in the hands of Telekom. If competitors want to offer telephone and Internet connections as a package, Telekom must give them access to the subscriber connections. After massive pressure from the European Union, this market is slowly moving, and Telekom is gradually losing its monopoly on telephone connections.

But even if there were several large providers with access to the telephone network, that would probably not improve the situation. You can see that in the energy markets. An oligopoly has developed there that behaves like a cartel. The prices are kept artificially high, even if the four dominant utilities Eon, RWE, Vattenfall and EnBW deny this: the world market prices and taxes are solely to blame for the high energy prices. The fact is that the four corporations generate more than 80 percent of the electricity in Germany and at the same time dispose of large parts of the electricity and gas network.

The Federal Network Agency intervenes in order to regulate such superiority in natural monopolies. It was founded in 1998 as a regulatory authority for telecommunications and post and renamed in 2005, because today it is also supposed to ensure that competition in energy supply and rail transport is possible. However, it has little scope for sanctions, it is not even allowed to impose fines. "However, competition only arises if the regulatory authority is allowed to sanction anti-competitive behavior," emphasizes Haucap. The government would have to equip the Federal Network Agency with extensive catalogs of measures against rule violations.

Deutsche Bahn AG is a special case. The Federal Network Agency has little control over her, and that is politically wanted. On the one hand, the federal government wants to bring the railway to the stock exchange. On the other hand, there should also be more competition on the railways - and as the privatization of the other natural monopolies has shown, this only arises when network operators and users are separated.

Without the rail network, the state-owned company is not worth much on the stock exchange, which would be bad for the finance minister's coffers. And this conflict of interest is difficult to resolve because, according to Justus Haucap: "We only have one track. It can hardly pursue two goals at the same time." -